OligopolyOligopoly
OligopolyOligopoly
Two examples of oligopoly
Two examples of oligopoly
Market shares of thelargest brewers
Market shares of thelargest brewers
Market shares of thelargest brewers
Market shares of thelargest brewers
0
5
10
15
20
25
30
35
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
$ per barrel Actual price
Yom KippurWar: Arab oil
embargo
First oil fromNorth Sea
Revolutionin Iran
Iraq invadesIran OPEC’s first
quotas
Cease-fire inIran-Iraq war Recession
in Far East
Iraq invadesKuwait
New OPECquotas
World-widerecovery
World-wideslowdown
Impendingwar
with Iraq
Oil pricesOil prices
0
5
10
15
20
25
30
35
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
$ per barrel Actual priceCost in 1973 prices
Yom KippurWar: Arab oil
embargo
First oil fromNorth Sea
Revolutionin Iran
Iraq invadesIran OPEC’s first
quotas
Cease-fire inIran-Iraq war Recession
in Far East
Iraq invadesKuwait
New OPECquotas
World-widerecovery
World-wideslowdown
Impendingwar
with Iraq
Oil pricesOil prices
OligopolyOligopoly
A profit-maximising cartel
A profit-maximising cartel
£
Q O
Industry D AR
Profit-maximising cartelProfit-maximising cartel
£
Q O
Industry D AR
Industry MC
Industry MR
Q1
P1
Profit-maximising cartelProfit-maximising cartel
OligopolyOligopoly
Price leadership
(assumption of fixed market share)
Price leadership
(assumption of fixed market share)
£
Q O
MR leader
AR D leader
AR D market
Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share
Assume constantmarket share
for leader
£
Q O
AR D market
MC
MR leader
PL
QT
AR D leader
QL
l t
Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share
OligopolyOligopoly
Game theoryGame theory
Profits for firms A and B at different pricesProfits for firms A and B at different prices
£2.00 £1.80
£2.00
£1.80
X’s price
Y’s price
A B
C D
£10m each
£8m each£12m for Y£5m for X
£5m for Y£12m for X
The prisoners' dilemmaThe prisoners' dilemma
Not confess Confess
Notconfess
Confess
Amanda's alternatives
Nigel'salternatives
A B
C D
Each gets1 year
Each gets3 years
Nigel gets3 months
Amanda gets10 years
Nigel gets10 years
Amanda gets3 months
OligopolyOligopoly
A decision treeA decision tree
Boeingdecides
500
seat
er
500 seater
500 seater
400 seater
400 seater
400 seater
A decision treeA decision tree
Boeing –£10mAirbus –£10m
(1)
Boeing +£30mAirbus +£50m
(2)
Boeing +£50mAirbus +£30m
(3)
Boeing –£10mAirbus –£10m (4)
Airbusdecides
B2
Airbusdecides
B1
A
OligopolyOligopoly
Kinked demand curve theory
Kinked demand curve theory
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
Current priceand quantity
give one pointon demand curve
£
QO
P1
Q1
D
D
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
MC2
MC1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve